To succeed as a stock market trader, a keen understanding of various technical indicators and tools is paramount. You can use them to predict short-term price movements of stocks and determine entry and exit points for your trades. They also indicate the volatility in the stock market, the ongoing trend, the possibility of a trend reversal or breakout, etc.
One such pattern is the broadening top chart pattern. It can help you identify potential price reversals and make profitable trading decisions. It is also known as the megaphone pattern due to its shape resembling an inverted megaphone.
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This article explores the broadening top chart pattern, its characteristics, significance, and how to use it to make trading decisions.
The broadening top chart pattern occurs in price charts, specifically for stocks, commodities, and forex trades. It is a reversal pattern that can appear during both uptrends and downtrends. It is characterized by its distinctive shape, which resembles an inverted megaphone or a widening triangle. The pattern is formed by joining a series of higher highs and lower lows during a trading period, creating a price channel that expands as you go up in the pattern.
The primary characteristics of the broadening top chart pattern include:
One of the most notable features of the broadening top chart pattern is that it signifies higher market volatility. This increased volatility is often caused due to conflicting emotions among stock market traders, resulting in erratic price movements.
The broadening top chart pattern is drawn by joining a series of higher highs and lower lows, creating a widening trading range over time. The pattern consists of two trendlines – one ascending (upper trendline) and one descending (lower trendline) - diverging from each other at the top. The trendlines form a megaphone-like shape on the chart.
Unlike other chart patterns such as flags, triangles, etc., the broadening top chart pattern does not provide a clear directional confirmation. Instead, it reflects uncertainty in the market and can give price reversal signals.
Volume plays a crucial role in confirming the authenticity of a chart pattern. In the case of the broadening top chart pattern, trading volume tends to increase as you approach the top of the pattern, indicating market uncertainty and a conflict between bulls and bears. However, the rising volume may suggest that a trend reversal may be around.
Within the broadening top chart pattern, the price of an underlying asset swings higher highs and lower lows. It can help you identify peaks and troughs during a trading period and make informed trading decisions.
The broadening top chart pattern takes some time to form, ranging from weeks to months. This is why it is unsuitable for intraday investors or those with very short trading horizons. However, those plying swing trading with short trading horizons can use this pattern to make informed trading decisions.
Trading with the broadening top chart pattern can be challenging due to conflicting signals. Therefore, you must exercise caution and use suitable risk management techniques before making investment decisions. You can also confirm your positions with other technical indicators and detailed chart analysis.
Nevertheless, below are the two common trading strategies associated with the broadening top chart pattern:
You can look for a breakout reversal above the upper trendline for a bullish breakout reversal or below the lower trendline for a bearish breakout reversal and take trading positions accordingly. However, you must confirm the breakout with other technical indicators, such as moving averages or oscillators. Additionally, remember to put stop-loss orders to manage your risks as markets can be volatile.
Another option is to trade within the expanding price channel by buying stocks near the lower trendline and selling them as they approach the upper trendline. Such a strategy suits traders who prefer marginal profits with short-term trading horizons.
The broadening top chart pattern can be identified from its distinct shape, resembling an inverted megaphone. It can help you identify breakout reversals or trade within a price range with short-term trading horizons. However, the signals can be confusing, and thus, you must confirm with several other technical indicators and chart analysis before making your trading decisions.
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